As a first run for replicating (for the purpose of refuting) the experiment run by Sobczyk, Shayne, and Mashayekhi ( in which they conclude that ten bonds are sufficient to diversify away the risk of extreme default-loss), I was running bond scans this mornings, just looking to see what was available and not intending to buy. But an issue popped up that was clearly attractive: invest-grade and offering a real-rate of return (after discounting for a 5% rate of inflation). Their financials were fine. It wasn’t an issuer I owned, nor was I over-weight their industry. 80 bonds were offered. So I did my buy and then went back to my scanning.

But as I worked, I noticed that issuer’s name wasn’t showing up any more, which I thought was strange. I had only taken five, and most of the remaining 75 should still be available. So I pulled T&S. My trade cleared at 13:06:38, and 16 minutes later, at 13:22:51, someone had taken the rest in a single trade. Looking further back in T&S to yesterday’s trades, two lots of 15 and 25 had come onto the market, and someone, again in a single trade, took them.

A couple of trades isn’t a trend. But this is what seems to be happening with this issuer’s bonds. As fast as they come onto the market, they are being bought. Whether that indicates smart sellers and dumb buyers (or, hopefully, the reverse) can’t yet be determined. But lack of supply and fast turnover do mean that the opportunities to get in are fleeting, which is generally the case with bonds. If it’s easy to open or add to a position, you probably don’t won’t to be doing it. Instead, the stuff that goes quickly is what you should be buying, and that means being there, ready to buy, when/if it becomes available.

For sure, unless you're looking at a screen all the hours that the bond market is open, you're going to miss many of these fleeting opportunities. But my guess in that if you put in at least three scanning sessions a week, you'll probably see 90%-95% of what should be looked at, and maybe even stumble onto a few surprises that you can grab before someone else does.

"Preparation, plus opportunity."

Charlie